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HMRC internal manual

VAT Government and Public Bodies

HM Revenue & Customs
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Local authority education services: school private fund income


Local authority maintained schools (including voluntary aided schools), and youth clubs (see VATGPB8885) are largely funded by the local authority. However, schools can also generate income independently of the local authority, for example from vending machines, tuck shops, and the sale of school uniform items or charges for the use of the premises outside normal hours. This income is usually referred to as ‘private fund’ income. It is generally, but not always, held in a separate bank account.

Because private fund income is generated from activities undertaken independently of the local authority, a private fund is not part of the local authority for VAT purposes. In the case of a local authority maintained school the private fund might be operated by the governing body, the head teacher acting as agent of the governing body, or some other entity such as a Parent Teacher Association.

Subject to the normal threshold a school (in the guise of its private fund) is required to register for VAT if it makes taxable supplies that generate this type of income which it uses purely to augment its own funds. Section 33 status (see VATGPB4000) does not apply to activities covered by the VAT registration.

A local authority may claim that it does not have to account for VAT because what is received is private fund income. This should be supported by documentary evidence and particular attention should be paid to income generated from school photographs (see VATGPB7840).

Input tax recovery on purchases using private funds

If the private fund is separately registered for VAT it can recover input tax subject to the normal rules. Local authorities cannot recover the VAT incurred on private fund purchases.

Alternatively, private fund income derived from sources other than the local authority can be donated to the local authority to be used to buy goods and services on the private fund’s behalf. However this does not apply to:

  • direct grants from the DfE to the governing bodies of foundation schools, or
  • income, including direct grants from the DfE, used to fund works which are the responsibility of the governors of a voluntary aided school.

Where income is donated the local authority can recover the VAT incurred, so long as it:

  • places the order
  • receives the supply
  • holds a VAT invoice on which it is shown as the customer
  • pays for the supply
  • retains ownership of whatever is purchased
  • uses it, or makes it available, for its own non-business purposes, and
  • keeps sufficient records for the purchase (and the purpose for which it is made) to be easily identified.

In the case of local authority owned buildings any income a maintained school obtains from letting its premises normally goes to the local authority. However, the local authority may agree, as part of a scheme under section 48 of the School Standards and Framework Act 1998, that the school may use the income. In that case the income can be treated in the same way as budget share funds when the school uses it to buy goods and services. In other words, the school is deemed to be acting as agent of the local authority in spending the money and the local authority is entitled to recover VAT incurred on the purchases.

This agency position does not apply in the case of foundation and voluntary aided schools where the local authority is not the owner of the buildings, even if the purchases are used directly in the provision of education. This is because the purchase is made by the governors who then make an onward supply to the local authority.